In a deal that once again demonstrates the strength of the Korean domestic market, a W800 billion ($677.5 million) subordinated convertible bond for unlisted Samsung Card closed three times oversubscribed.
Few bankers can remember the last time an unlisted Korean company launched a convertible bond of such magnitude. Indeed, only KT has launched bigger public deals in the Korean convertible arena - including its W1.4 trillion exchangeable bond.
On this occasion 10% of the deal was bought by foreigners and 90% by retail investors and corporates. A total of 27,583 retail investors bought the deal, with average order sizes of W80 million.
"This deal signals that the Korean people think the credit card industry is set to improve," says Hyeon Young Kim, head of capital markets at Samsung Securities, which was a joint underwriter on the deal with lead manager, KDB.
As is well known, the Korean credit card industry has been in a parlous state. In the case of Samsung Card the delinquency rate had risen from 5.1% last year to 9.9% in April. Its 2002 net income of W553 billion had turned to a loss of W186.8 billion in the first quarter.
However, Samsung Card has initiated an aggressive restructuring plan (via cost savings) that is expected to bring in W606 billion of additional revenues in 2003 and still has the best delinquency rate among its peers. The convertible formed part of a plan to rebuild its capital base.
Samsung group companies (such as Samsung Electronic) own 88% of Samsung Card and recently subscribed to a W200 billion rights issue. Following this convertible bond, Samsung Card expects to have a year end liquidity surplus of W1 trillion. It will also have increased its capital adequacy ratio to 17.2%.
The next step is to launch an IPO for Samsung Card, with many suspecting this will happen in 2005.
Indeed, should Samsung Card fail to do an IPO, the terms of the convertible bond will be onerous.
The five year deal has been structured with a yield to maturity of 9% in the event of there not being an IPO. This amounts to W300 billion of interest expense.
However, should an IPO occur and the bondholder not convert, their yield to maturity falls to 5%. This compares favourably on a funding basis with Samsung Electronics (which is locally rated triple A), which can raise five year straight debt at 5.43%. Moreover, Samsung Electronics owns 56% of Samsung Card.
Indeed, while the exposure in this convertible is to the more lowly rated Samsung Card, many investors seem to be taking comfort that they are purchasing Samsung Group credit risk.
In the event of an IPO the bondholders can convert to equity at W24,000 a share or the IPO price (whichever is lower). Should all of the bondholders convert, Samsung Electronics, for example, would see its ownership of Samsung Card diluted to 35.41%.
It is clear that this deal's success reflects a resurgent confidence among investors in Korea that the worst may be over both in the credit card sector and in the market as a whole - especially following the SK Global restructuring. Recent stock surges may have fueled their optimism, but it remains to be seen whether the optimism is perfectly timed or premature.
